What problem can be solved by Bitcoin mining?
Bitcoin is frequently criticized for its massive energy consumption. The Texas-based company Layer1 Technologies has its own solution to this problem.
Bitcoin is still the most important cryptocurrency people know about, and it serves as the entry point of the crypto space. However, every innovative project has to pay its price. For Bitcoin, it is its high carbon footprint created by mining.
Bitcoin, especially its mining process, gets a lot of criticism because of its energy use. But the new company Layer1 Technologies, supported by Peter Thiel, is trying to do the unthinkable — stabilise the energy system, generate profits by producing fewer BTCs and make the US a significant player in the Bitcoin mining industry.
Texas grid: decentralised energy market
Unlike most of the USA, Texas has an unregulated power system that separates utilities into three separate functions:
- Generation — power plants, solar power plants, wind farms, etc;
- Transmission — power transmission lines, which are still regulated by the state of Texas;
- Retail power suppliers — customer service and billing of electricity.
As a result, there is a complex market in Texas with private electricity generators that offer retail electricity suppliers different wholesale prices from different locations in the greater Texas area. Deregulation of energy production has led to a dramatic increase in natural gas production as well as renewable energy sources, which provide a cheaper and cleaner solution to long-term energy demand.
It is important to note that any use of electricity is as clean as the energy system itself. Texas leads the U.S. in the production of wind energy, which provides peak power at night. The state also produces an abundance of renewable energy from solar farms, which provide maximum power in the middle of the day. However, the increase in renewable energy use in Texas over the last decade has had some side effects.
The Duck Curve
Energy consumption depends on the day, season and year. Warm periods are coming, so people are increasingly using air conditioning, which is the biggest driver of retail energy demand in Texas. And that is not surprising. On a typical day, energy demand rises sharply at the start of the day, drops significantly during working hours, and then peaks in the afternoon when people return home after work. The day’s peak unfortunately coincides with the minimum energy period from renewable sources.
However, the excessive abundance of renewable energy from the sun and wind in the middle of the day undermines the economy of electricity production, as net energy production (network load) continues to grow without any outlets. This leads to a situation known as the “Duck Curve”, where too much energy is simply generated, which is eventually reduced, wasted or sold at negative prices. Conversely, as demand increases at the end of the day, energy generators tend to rapidly increase the energy load, usually from fossil fuels.
Further development of renewable energy sources — wind and solar — exacerbates the "Duck Curve" and creates a negative feedback loop. It is also difficult to stop coal-fired or nuclear power plants because the economies of both require them to operate continuously, which actually creates a minimum price. This leads to the phenomenon that every additional unit of solar and wind energy reduces the profitability of renewable energy, which further contributes to negative pricing and creates instability in the energy system.
This dilemma is compounded by the fact that transporting electricity over long distances causes significant losses and storage is not yet economically feasible to securely hold enough energy for night-time consumption. In the short and medium term, we still have two solutions to this unique problem:
- Energy consumption during periods of overproduction to prevent reduction (waste) and negative prices;
- Stopping energy consumption at high demand to prevent the use of more expensive non-renewable energy sources.
Although this sounds simple, energy demand is inelastic and the life cycle of human energy consumption usually does not coincide with peak production of renewable energy.
Bitcoin Mining: a demand response mechanism
By coincidence, Bitcoin solves the above problems:
- Bitcoin mining consumes energy at a relatively constant speed;
- From an energy point of view, a BTC mining operation is a flexible load, i.e. it is relatively easy to shut down as it does not require any continuous operations.
Responding to demand is the process of reducing production and consumption of energy at times of peak energy demand. When energy demand peaks, for example during the summer heat in Texas, energy costs can rise rapidly from $100-150 per megawatt hour (MWh) to thousands of dollars per megawatt hour. Layer1 is benefiting from this option by negotiating long-term demand response contracts with ERCOT, the Texas energy regulator. In fact, Layer1 agrees to switch off at any time, receiving an annual bonus (19-25 MWh) depending on the expected demand for electricity. Layer1 claims that this demand response agreement will effectively reduce their energy costs to less than one cents per kWh.
The Cambridge Bitcoin Electricity Consumption Index reports an average cost of five cents per kilowatt-hour ($0.05/kWh) based on their most recent and several previous studies. While Layer1's cost advantage of four cents seems small, in a market where electricity is the biggest cost, cost savings over time have a major impact.
Responding to demand helps stabilise the energy system by eliminating price surges, leveling off energy demand and adjusting economic incentives — reducing negative pricing — so that the growth of renewable energy sources can continue. The Layer1 strategy now has an obvious disadvantage: their mining devices are less frequently used. However, in exchange for a guaranteed income, this can be an effective hedge for the miners against BTC volatility.
The Future of Bitcoin Mining in Texas
As Texas is deregulated, there are few permit requirements for Bitcoin Mining projects, making it easier to buy land, build mining facilities and get started. For more complex operations, it would even be possible to contract with solar or wind farms as part of a project to receive government subsidies and become energy producers themselves. Almost all other US states publicly subsidised utilities with natural monopolies and high barriers to entry that prevent new power generation companies and retailers from operating.
Due to Texas’ renewable energy potential and lack of market regulation, Bitcoin Mining could grow throughout the state. To this end, Bitmain launched its mining farm in Rockdale, Texas, in October 2019, which aims to provide mining capacity of over 300 megawatts. It is possible that other companies and entrepreneurs are already looking for partners and will establish similar businesses in the coming years.
The CoinShares report for December 2019 estimated the penetration of renewable energy sources into the Bitcoin energy balance at 73%. Energy is a local source, i.e. it varies according to location, as some geographical regions have abundant geothermal, hydro or other renewable energy sources. This makes Bitcoin environmentally dependent on where it is produced. It is worth repeating: electricity is as clean as the network that produces it.
If Bitcoin mining uses energy from natural gas or peak coal-fired power plants — power plants that are only switched on when a certain level of demand is reached — then it is not exactly environmentally friendly. Even hydroelectric dams and wind farms have ecological consequences. There is no BTC price limit and therefore no limit on the amount of energy that can be used in Bitcoin mining. This is the nature of Bitcoin. The ever-moving altruistic goal of environmental slavery ensures that Bitcoin will never be left without environmental consequences. But the advantages of Bitcoin outweigh its disadvantages.
Bitcoin mining is not only an innovative way to create value, it is also a great source of passive income. Get your daily BTC payouts with our Bitcoin cloud mining platform Hashmart.io!
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